China's central bank has opted to extend a significant policy loan at unchanged terms, signaling a commitment to supporting a burgeoning economic rebound while mitigating pressure on the yuan.
The People's Bank of China (PBOC) disbursed 125 billion yuan (approximately S$24 billion) through its medium-term lending facility (MLF) on May 15, matching the amount of maturing loans this month. Maintaining consistency, the central bank retained the one-year policy rate at 2.5 per cent, aligning with expectations from a Bloomberg survey.
According to Ming Ming, chief economist at Citic Securities, the loan rollover reflects stable overall liquidity, coupled with the imminent issuance of ultra-long special government bonds. Ming noted, "The policy rate remains unchanged as economic indicators stabilize, and the yuan continues to face pressure."
This decision follows a contraction in the broad credit measure last month, underscoring Beijing's hurdles in reigniting investment and consumption. Concerns over exacerbating capital flight and further weakening the yuan due to an already significant US-China yield gap also influenced the PBOC's decision to maintain the MLF rate.
The Chinese currency has depreciated around 2 per cent against the US dollar in the domestic market since the beginning of the year.
The PBOC's cautious approach suggests a shift towards relying more on fiscal stimulus to achieve the ambitious growth target of around 5 per cent for the year. Notably, the MLF decision preceded the Ministry of Finance's plan to issue the first tranche of one trillion yuan of ultra-long special sovereign bonds, an occurrence rare in the past 26 years.
Furthermore, the central bank's stance reflects the abundant liquidity in China's financial system, with reduced interbank funding costs diminishing the appeal of MLF loans. The interest rate on one-year AAA-rated negotiable certificates of deposits, a favored debt instrument, now stands at less than 2.1 per cent, below the MLF rate.
Despite this, some economists, like Zhang Zhiwei, chief economist of Pinpoint Asset Management, expressed disappointment over the PBOC's decision to maintain the MLF borrowing cost. Zhang emphasized the need for more aggressive measures to boost domestic demand, citing an overreliance on exports to sustain the economy.
Paraphrasing text from "Bloomberg" all rights reserved by the original author.
